Some thoughts on $ETHBTC

Disclaimer: This is for educational purposes only and is not financial advice.

Fundamental Analysis

Major changes to $ETH are coming with the Byzantine/Metropolis HF — read more about that in my BraveNewCoin articles here, here, and here.

I suspect many traders are simply taking a ‘wait and see’ approach in regard to how the HF pans out and is perceived.

$ETH miners are certainly not ecstatic with the exponential difficulty adjustments and eventual decreased block rewards from 5ETH to 3ETH. $ETH hodlers are happy because this decreases inflation.

Scaling is also a major issue that Metropolis will attempt to address.

Additionally, should the $ETH PoW to PoS transition go poorly over the next few years, I’d expect $ETC to pick up some of that market share.

Here’s how price reacted to the three most recent $ETH HFs:

Hardforks (Yellow)

02/29/16 – 2nd HF to allow for further protocol changes

07/20/16 – 3rd HF to reverse DAO hack

11/22/16 – 4th HF to prevent DoS attacks

Part of my working theory regarding the explosion and subsequent contraction in $ETHBTC ratio is three-fold.

ICO Mania

No doubt that ICOs, many of which have exclusively accepted $ETH, have fueled the demand curve for $ETH in the end of 2016 and the beginning of 2017.

Many ICOs are now accepting multiple cryptocurrencies. ICOs are also slowing their intake slightly due to regulation in various countries, namingly China. These regulations have lagged even the consolidation in $ETHBTC ratio but definitely contributed to decreased demand.

2. $BTC Block Size Drama

The rise of $ETH, and many other alt coins (yes, $ETH is an alt coin), occurred in the setting of ongoing civil war regarding Bitcoin’s block size. A majority of users got what they wanted: SegWit and cheaper transactions. The war ended with a secession by $Bcash.

Now with the potential SW2x fork, there is similar and additional problems — fighting among factions, brand confusion, replay attack potential, and a potential drop off in hash rate with a slowed network until a difficulty adjustment.

The $ETHBTC ratio may respond in a bullish direction if things get messy for $BTC. The Core protocol will remain unaffected but the court of public opinion likely cares much less about the nuts and bolts of $BTC and much more about drama.

3. $ETH on Coinbase

Without an on-ramp for new money, it’s much harder to compete with Bitcoin. I suspect that like a wine menu at a restaurant, most people knowing nothing about the product, choose the middle option. With $BTC, $ETH, and $LTC listed on Coinbase, many new users many have just choosen $ETH.

Whole integer bias, or being able to buy more $ETH as opposed to a fraction of a $BTC, likely played a role as well among new users knowing nothing about the options.

Admittedly, this is extremely loose evidence but not something to disregard completely.

Technical Analysis

$ETHBTC has been squeezing heavily for 3 months now on descending volume, suggestive of consolidation. Anytime you see a descending volume profile, you will almost always be able to identify a chart pattern.

A blatant descending triangle has formed, generally a bearish continuation signal. A break of the large support zone (green) will be conclusive. Triangle breaks typically occur when 3/4 full, so a break is likely sooner rather than later. A break of the triangle in either direction will likely occur on high volume, thus breaking the descending volume profile.

The daily 50/200EMA cross is bullish with price remaining above the 200EMA. There is no question here that price remains in bullish territory for the moment.

The 50 and 200 EMAs are both almost flat and squeezing price, suggestive of momentum-less consolidation. A clean break, with a candle close, in either direction would be an entry signal for a long or short. A bearish 50/200EMA cross, or Death Cross, would most certainly be a short entry signal, long exit signal, and spot exit signal. A similar cross occurred in October 2016.

The multiple 50/200EMA rejections on the 4h paint not a bullish picture but rather a picture of heavy bearish continuation. A bullish 50/200EMA cross would be a strong long entry signal.

The 1W singled Cloud (10/30/60/30) now has more than enough data to give actionable signals. Price is far above Cloud so there is again no question that weekly trend is bullish. There was a bearish TK cross above Cloud (red arrow), a long exit signal, four weeks ago. The Cloud is great at letting you know where trends are and where they are not. The bearish TK cross signifies the previous bull trend lost momentum.

Future Cloud is also bearish. A long re-entry would trigger with a bullish TK re-cross and a bullish twist of future Cloud. There is plenty of room for price to remain in bullish territory above the Cloud (yellow), while still breaking down relatively heavily from the current zone.

The 1D singled Cloud shows all Cloud metrics bearish: price position relative to Cloud, future Cloud, TK cross, and lagging span. There is an opportunity around October 17th for a break in the bear trend due to a Kumo twist, which represents a zone of zero resistance.

A Kumo breakout through the Kumo twist place a candle above the Cloud, the first time since the beginning of July. For this reason, I’d consider this a strong long entry signal. Because future Cloud is thin at the moment, a Kumo breakout would almost certainly immediately twist bullish as well.

Immediate targets for that long would be fib horizontals, with the most likely target being the 50% fib (not actually a fib) at 0.11.

The 1D doubled Cloud (20/60/120/30) shows mixed signals with price below cloud, a bullish TK cross, and bearish future Cloud. Just as the bearish TK cross signal a long exit on the weekly chart, a bullish TK cross two weeks ago signaled a short exit.

Despite the strong bearish Cloud signals, there is a setup for an Edge to Edge trade. This would trigger with a candle close inside the Cloud, the target being the opposite edge of the cloud. I consider these setups high probability trades, more so when the TK cross matches the direction of the trade, which it does in this case. The long flat Kumo, which will act as a magnet for price, also signifies extended ranging in one zone without making lower lows.

The 4h double Cloud shows all Cloud metrics bearish but is also a bit of a ranging mess. When I see this I move to higher time frames and/or use BBands.

Daily BBands are surprisingly wide despite the extended consolidation. Even so, price has remained below the median of the BBands for ~11 days. The longer price lingers below the median, the higher the likelihood of a bearish resolution.

As the range of the descending triangle becomes tighter, expect BBands to tighten as well. A candle close outside of the BBands on volume should determine direction.

Although John Bollinger has disagreed with me in regards to these settings for cryptocurrencies due to the 24/7 aspect of the markets, I think some adjustment to settings is helpful when necessary. The 20 setting on the daily represents each trading day in a month for legacy markets. A change to 30 would better represent trading days in a month for cryptocurrencies.

Like I said in my BraveNewCoin articles, changing the consensus algorithm is a big deal. If anything wrong happens, you can expect near term sentiment to turn extremely bearish. With price consolidation as heavy as it has been, this would be deep a retracement, likely around the 0.040 level.

Technicals are leaning bearish but need an on volume break around 0.067 to be definitive. Cloud, BBands, and 4h EMAs will all provide ample evidence/confluence for a long entry, should it present itself, with an immediate target of 0.11.